Under the Reserve Bank Act 1959, the Reserve Bank has the sole authority
to issue banknotes in Australia. As such, a key responsibility of the Bank
is to maintain public confidence in banknotes so that they remain an effective
payment mechanism and a secure store of wealth. This submission provides some
details on banknotes in circulation and some comments on deterrence against
banknote counterfeiting and money laundering.

Background

At the end of June 2014, there were around 1.3 billion banknotes (around 54 banknotes
per capita) worth $61 billion in circulation (Table 1). In terms of number
of banknotes, this represents a 64 per cent increase over the past 10 years.
These figures reflect personal holdings by individuals, banknotes in ATMs or
banknote acceptance machines, banknotes in cash registers, banknotes in financial
institutions to meet daily customer demand and banknotes held in commercial
storage depots by cash-in-transit companies.

Table 1: Banknotes in Circulation

As at 30 June 2014

Value

Number

$ billion

Per cent
of total

Million

Per cent
of total

Per capita

$5

0.8

1

161

13

7

$10

1.1

2

112

9

5

$20

3.1

5

155

12

7

$50

28.7

47

575

45

24

$100

27.0

44

270

21

11

Total

60.8

100

1,272

100

54

Sources: ABS; RBA

While the number of banknotes for all denominations has risen over this period, there
has been some disparity in their growth rates (Graph 1). Specifically,
the number of $50 and $100 banknotes in circulation has been rising faster
than the lower-value $5, $10 and $20 denominations. This phenomenon, in which
the high-denomination banknotes in circulation are increasing more quickly
than lower denominations, is common to many other countries.

Graph 1

There is very little information available on the reasons for the relative popularity
of the higher-denomination banknotes. Possible reasons include:

In the case of the $50 banknote, it is probably at least partly related to the preference
of banks and other financial institutions for stocking ATMs with $50 banknotes.

High-denomination banknotes offer advantages over lower-denomination banknotes as
a means for storing wealth (e.g. only ten $100 banknotes are needed to store
$1,000 compared with two hundred $5 banknotes). The low interest rate environment
currently prevailing in Australia, where there is less incentive for wealth
to be stored by individuals in financial institutions, may explain to some
extent the high number of $50 and $100 banknotes in circulation. A recent
survey by the Bank indicated that many individuals store banknotes in places
other than their wallet (Meredith, Kenney and Hatzvi 2014, pp 48–49).

Discussions with banks suggest that the high value of the Australian dollar compared
with other currencies may make Australian currency a favoured form of storing
wealth overseas. Transporting $100 banknotes to meet this demand will obviously
cost less than the lower denominations.

Counterfeiting in Australia

The number of counterfeit banknotes detected in circulation has increased in recent
years, with levels rising from around 8,400 counterfeits in 2009 to around
18,000 counterfeits for 2013. This represents an increase from 8 to around
15 counterfeits detected for every million banknotes in circulation. While
this is still low by international standards, the trend has prompted the Reserve
Bank to develop a new banknote series that will significantly improve the security
of Australia's banknotes and ensure continued long-term confidence in the
currency (Kim and Turton 2014, pp 5–11).

Counterfeiting imposes a direct financial cost on the public. Since counterfeit banknotes
cannot be redeemed for value, individuals or businesses that unwittingly come
into possession of a counterfeit incur a financial loss. In terms of the financial
impost on the public, counterfeiting in Australia represented a loss of around
$1 million in 2013. Although this is relatively low compared with other criminal
activities (e.g. the Australian Payments Clearing Association reported that
in 2013 payment card fraud totalled $304 million), the direct impact of
losses on individuals and small businesses is considerable.

Notwithstanding that counterfeiting is a crime in its own right, the engagement in
counterfeiting activity can also provide a means for criminals to fund other
activities such as drug manufacture and distribution. Criminal groups involved
in these activities often have access to distribution networks that can facilitate
the passing of counterfeits.

The threat counterfeiting poses can be illustrated by a significant counterfeiting
incident that occurred in 2010. Large volumes of high-quality polymer $50 counterfeits
that were difficult for the public to detect were passed into circulation over
a relatively short period of time. This incident highlighted the challenges
the Bank faces in an environment where counterfeiting operations are gaining
greater access to more sophisticated printing and scanning equipment (Kim and
Turton 2014, p 4). The Bank understands that this incident was also an example
of the links that can exist between the two criminal activities of drug distribution
and counterfeiting.

Counterfeit Deterrence Arrangements

Counterfeit banknote offences are punishable under the Crimes (Currency) Act 1981, which includes provision for significant
penalties. The Australian Federal Police (AFP) prosecutes counterfeiters under
the Crimes (Currency) Act (federal legislation), while state/territory police
can prosecute counterfeiters under either state/territory or federal legislation.

The Reserve Bank works closely with the AFP and state/territory law enforcement agencies
by providing expert information and statistics about counterfeit banknotes
detected in circulation or seized by law enforcement agencies.

In 2009 the Reserve Bank and the AFP entered into a Deed of Agreement, which resulted
in the Reserve Bank assuming a number of administrative functions relating
to counterfeit banknotes that had been previously undertaken by the AFP. This
change enabled the AFP to allocate greater resources to counterfeit investigations
and enabled the Reserve Bank to collate and analyse counterfeit data more efficiently.

Under these arrangements, counterfeit banknotes are received by law enforcement agencies
from a number of sources including armoured car companies, financial institutions,
retailers, members of the public and the Reserve Bank's National Note Processing
and Distribution Centre (NNPDC). These counterfeits are examined by the Reserve
Bank's Counterfeit Examiners at the Bank's Counterfeit Examination
Laboratory located in Craigieburn, Victoria. In the case of counterfeits retained
as evidence in prosecutions, the Reserve Bank's Counterfeit Examiners also
prepare expert witness statements when requested.

The Reserve Bank also has close relations with international law enforcement agencies,
overseas central banks and industry groups. Information is shared with these
groups at appropriate forums to support the global effort to counteract emerging
threats against banknotes as a safe and secure means of payment.

Proposed Crimes (Currency) Act 1981 Reform

A number of difficulties that the AFP and the Reserve Bank encounter with regard
to the existing provisions of the Crimes (Currency) Act were outlined in a
submission to the Commonwealth Attorney-General's Department in 2009.

In that submission, the Reserve Bank proposed that it assume some of the AFP's
responsibilities associated with administering counterfeit banknotes. The additional
activities that the Reserve Bank could take responsibility for include the
direct receipt of all counterfeit banknotes not associated with any ongoing
criminal investigations or prosecutions from federal and state law enforcement
agencies, armoured car companies, the NNPDC, financial institutions, retailers
and members of the public.

Under the proposed arrangements, the AFP and state/territory police would retain
responsibility for the investigation and prosecution of counterfeiters and
would continue to be responsible for any evidentiary counterfeit banknotes.
Implementation of these changes would ensure the continued efficiency of the
counterfeit deterrence arrangements currently in place without the need for
a Deed of Agreement between the AFP and the Reserve Bank.

This matter remains outstanding with the Attorney-General's Department.

There are also limitations in the Crimes (Currency) Act, which have been more recently
identified and whereby the Act's powers are restricted to domestic borders.
Recognising that organised criminal groups have an international reach, the
Reserve Bank sees a change to legislation in this area as a necessary step
in order to provide the AFP with additional powers when investigating counterfeiting
offences that relate to Australian banknotes which are committed overseas.

Damaged Banknotes

The Reserve Bank offers a Damaged Banknotes Facility designed to improve the quality
of banknotes in circulation and ensure members of the public do not face financial
hardship if their banknotes are accidently damaged.

On 23 January 2014, the Reserve Bank updated its Damaged Banknotes Policy. The previous
Damaged Banknotes Policy said very little about the rationale for the Bank's
Damaged Banknotes Facility, beyond aiming to have only good quality banknotes
in circulation. In practice, this meant that the Reserve Bank processed damaged
banknote claims subject to verification that banknotes were not deliberately
damaged and the requirements of the Reserve Bank's Anti-Money Laundering
and Counter-Terrorism Financing (AML/CTF) Program had been met.

The revised Policy makes clear that the Damaged Banknotes Facility is only offered
to members of the public who have unwittingly come into possession of damaged
banknotes or those whose banknotes are accidentally damaged, with the aim of
ensuring that they do not face financial hardship. The aim is to protect the
integrity of the Facility and the reputation of the Reserve Bank by giving
it the right to refuse to process claims that it assesses are inconsistent
with these principles. In particular, the new Policy makes clear that the Reserve
Bank will not process claims where there is doubt about the nature of the claimant
or how the damaged banknotes came into the possession of the claimant. The
Policy also emphasises that the Reserve Bank will not process claims where
either the cause of the damage or the source of the damaged banknotes is not
explained by the claimant to the reasonable satisfaction of the Bank, and that
the Reserve Bank will refer a claim to the police if it believes an offence
may have been committed.